BANK OF AMERICA: Stocks are almost as expensive as they were during the tech bubble

Bank of America Merrill Lynch is joining the chorus of
strategists on Wall Street who are warning that the stock market
is expensive.

Savita Subramanian, an equity strategist at the bank, pointed to
the median of the price-to-earnings ratio, which measures whether
company stocks are fairly valued in relation to their earnings,
for the stocks in the S&P 500 index.

"The S&P 500 median P/E is currently at its highest levels
since 2001 and suggests that the average stock trades a full
multiple point higher than the oft-quoted aggregate P/E," she
wrote in a note on Tuesday.

Stocks are considered expensive because the median P/E ratio is
well above its historical average, indicating higher prices than
are justified by the underlying earnings-based value of the
companies.

"This puts it in the 91st percentile of its own history and just
14% from its Tech Bubble peak," she said. The Nasdaq crashed
nearly 80% beginning early in 2000 after tech-company valuations
rose to levels far above their real value.

Bank of America Merrill Lynch

Subramanian said the stocks most responsible for pulling up the
P/E ratio were mid-caps, with the median stock in this category
trading at the 92nd percentile of its history.

Mega-caps, or companies that are worth more than $100 billion in
market capitalization, are trading well below their valuations at
the height of the tech bubble and are keeping overall valuations
somewhat contained. That's why Subramanian also advised clients
to "move up the cap spectrum."

But it's not just the price-to-earnings ratio that's flashing a
warning light. Subramanian included the table below, which shows
that more than a dozen measures of the market's valuation are
trading above their historical average:

Bank of America Merrill Lynch

The lavish cost of stocks is a favorite go-to for naysayers who
think an end to the seven-year bull market for stocks is
imminent. Against many odds, the S&P 500 rallied to all-time
highs this year, bouncing back from its worst-ever start to a
year.

Even though stocks are trading at a premium, Subramanian argued
that bonds are more expensive.

Investors chose the US over other developed markets to buy
government bonds as interest rates elsewhere fell near or below
zero. That demand raised the prices of bonds and drove down the
yields on Treasurys.

"Relative to other asset classes, the case for stocks is most
compelling vs. bonds, where the risk premium remains elevated and
the S&P 500 dividend yield trades near a 60yr high vs. the
10yr Treasury yield," Subramanian said.